Sprint’s last stand? Sprint, Kansas City again sit at the center of merger speculation

On Thursday, precisely at 5 p.m., the clock started ticking again on Sprint’s future.

The hour marked an end to a federally imposed quiet period that had been mandated during a $19.6 billion government auction of wireless airwaves licenses. For more than a year, the country’s giant telecom companies couldn’t talk to one another about deals.

Now, the merger teams at Sprint, Verizon, T-Mobile, Comcast and others are unleashed. And Kansas City stands to witness a whirlwind of wheeling and dealing over the fate of Sprint, one of the area’s biggest employers.

Outside its hometown, however, Sprint is known more as “the fixer-upper on the block,” needing a partner to propel it into a stronger future in the face of furious competition.

The Overland Park-based wireless company could come out on top in a merger. It also could be swallowed up in an acquisition, or be split up and disappear as a standalone business. It also could be left out of the pairings altogether. Each prospect carries huge implications for Kansas City.

Analysts say the top scenario on their list is a Sprint bid to merge with rival T-Mobile. Much has changed since Sprint gave up on its first effort to buy T-Mobile nearly three years ago.

Other speculation sees Sprint hooked up with a cable company such as Comcast, which already is tiptoeing into the wireless business and could use a ready-made network.

And there has been conjecture aplenty about other combinations — Dish and T-Mobile, Charter and Verizon, Disney and Verizon. Sprint would be left out but have to confront a reshaped competitive landscape.

Sprint’s chairman Masayoshi Son has said the company could be a buyer or a seller, could look for a merger with T-Mobile or some other company, or stand alone.

Sprint’s future rests with Son more than anyone. He’s the CEO and founder of Tokyo-based SoftBank Group Corp. that owns more than 80 percent of Sprint’s shares. Sprint CEO Marcelo Claure, who is roughly halfway through a five-year turnaround plan, was in Tokyo last Thursday meeting with Son and tweeted about “exciting times ahead.”

“Both Masa and Marcelo have been very vocal that they’re open to many options — open to acquire other service providers, open to merge with another company — if that would make Sprint stronger,” Sprint spokesman Dave Tovar said.

How Kansas City would fare depends greatly on which road the company takes. In any scenario, thousands of area jobs and other economic, civic and philanthropic impacts come into play.

“It strikes fear in the hearts of all of us, that Sprint wouldn’t have the same footprint,” said Tracey Osborne, president of the Overland Park Chamber of Commerce.

Unrequited affections

Three years ago, the merger team at Sprint operated in high gear. The target was T-Mobile, then the industry’s smallest national carrier.

Driving the team were billions of dollars in cost savings that would spring from a merger between the nation’s third and fourth largest wireless carriers. They would eliminate duplication in payrolls, network investments, marketing and other costs.

A merger also would create a pool of subscribers much closer to the enormous customer counts that Verizon and AT&T bill each month to cover their own expenses.

Regulators in Washington had other ideas, and no deal emerged.

Since then, the landscape has shifted. President Donald Trump’s administration is seen as potentially friendlier to a deal. And the two companies’ fortunes have diverged. Today, T-Mobile dominates the wireless industry’s competition for customers.

Its Un-Carrier campaign and pricing plans have attracted more than 1 million new subscribers each quarter for four years. With 71.5 million customer connections at the end of last year, T-Mobile easily exceeded Sprint, which now ranks No. 4 with 59.5 million.

Sprint will update its totals Wednesday, but it is expected to fall further behind T-Mobile, whose subscriber total grew to 72.6 million at the end of March. Together, they could claim more than 122 million subscribers.

AT&T ended March with 134.2 million wireless subscribers, having shed 641,000 connections during the quarter.

T-Mobile essentially leaves little room for other carriers to grow. Even industry leader Verizon reported its first-ever decline in cellphone customer totals in the first three months of this year. Verizon reports only retail subscriber totals, which were 108.5 million at the end of March.

Success also means that global operator Deutsche Telekom, which owns about two-thirds of T-Mobile’s shares, is no longer an eager seller. T-Mobile has become the prize, what some have called a kingmaker for the industry’s future.

And the prize comes with an enormous price tag, estimated as high as $80 billion to $90 billion.

Under SoftBank’s hand, Sprint has made strides as well. It has reversed what had been a declining customer count, stabilized its sagging revenues and logged better results in independent network tests.

Mark Stodden,an analyst at Moody’s Investors Service, said Sprint has valuable wireless airwaves licenses. But it also has weak financial results, lots of debt and a constant demand for fresh cash that it has supplied by borrowing against those airwaves licenses, customers’ leased iPhones and network equipment.

In many ways, Sprint’s attraction to T-Mobile has become an unrequited one.

“Sprint would love to do a deal,” Stodden said. “I just don’t know that T-Mobile could be convinced. There’s less upside for them.”

Sprint’s Son reportedly has warmed to merger plans that would give Deutsche Telekom control of the merged companies, a concession from his original intentions.

Analyst Jonathan Chaplin at New Street Research suggested breaking up Sprint. Spin off its wireless airwaves into a new company, still controlled by SoftBank Group, and merge the rest into T-Mobile in a cheaper, smaller, easier deal.

Each idea would increase the likelihood that Kansas City would see significant job cuts.

Analyst Jeffrey Kvaal at Nomura Instinet told clients in February that “a large part of the synergies would be headcount reductions,” so large that it might jeopardize approval in Washington.

Trump had made jobs a campaign centerpiece. Son played to that focus with a pledge to Trump last December that Son’s companies would bring 50,000 jobs to the United States, including 5,000 at Sprint.

Cable connection

One way Son could make progress toward that jobs pledge would be to find a partner other than T-Mobile.

Overland Park would no longer be the corporate headquarters if Sprint is purchased by a national cable operator, but it easily could remain a key operations center.

A cable company still would look for payroll savings in traditional areas such as administration, marketing and the like. But its management also would be buying a wireless network and need the expertise to run and improve it.

By contrast, a Sprint/T-Mobile merger means one of the two networks would be shut down. The merged company wouldn’t repeat Sprint’s costly mistake of maintaining two networks years after its merger with Nextel.

Comcast has shown the most interest in adding wireless phone services to its current bundle of television, telephone and internet services. It has a contract now that allows it to begin selling wireless services this summer using Verizon’s network.

Analysts also watched closely when Comcast raised its paddle to bid on new wireless airwaves licenses the federal government auctioned earlier this year.

Comcast bought fewer licenses than many expected, and it bought only in markets where it already offers its bundle of other services. The signal was Comcast might be more interested in buying something else.

“Or, to put it more bluntly, the odds that they will someday buy a wireless operator — read T-Mobile or Sprint — just went up,” Craig Moffett of MoffettNathanson Research told clients earlier this month.

“Someday” is the key word, as Comcast seems to be moving slowly into the wireless competition. One reason: The wireless industry’s move toward unlimited data plans has limited the revenues companies can earn even as consumers view more and more data-gobbling video on mobile devices.

Another cable company, Charter Communications, might also have an interest in the wireless market. Analysts see it as less motivated to buy Sprint or T-Mobile, in part, because it still is digesting its purchase of Time Warner Cable.

Other potential deals get analysts’ nods, such as T-Mobile merging with Dish Network, the satellite television company that controls lots of wireless airwaves licenses but has no network to run services on. T-Mobile would gain television services it could bundle with wireless services, as AT&T has done with its purchase of Dish’s rival DirecTV.

Verizon has been mentioned as a possible suitor for Dish, and Verizon CEO Lowell McAdam told Bloomberg News that he’d be interested if Disney, CBS or others showed interest in a deal. AT&T is waiting for Washington’s ruling on its bid to buy Time Warner, the one that owns HBO not the one that broadcasts it.

If others pair up, that would leave Sprint isolated and at a disadvantage against reconfigured competitors.

With the merger game afoot, Sprint is more or less compelled to play, said Berge Ayvazian, an analyst at 20/20  Wireless.

“Just to change the trajectory of the company, hopefully in a positive direction, to become a player because they’re not a player now,” Ayvazian said.

Which is why chamber president Osborne and other area leaders have embraced moves Sprint has made in the past, even when they’ve come with uncertain futures for the Kansas City area.

For example, SoftBank paid $21.6 billion for control of Sprint in 2013. Once the effort to buy T-Mobile failed, Sprint changed CEOs, laid off thousands of workers and embarked on a turnaround.

“Whatever makes a stronger Sprint in the long run is going to be better,” said Osborne. “That’s how we looked at the SoftBank deal.”

Little giant

If there is a consolation to Sprint’s uncertain future, it is that the company no longer stands as the Kansas City area’s undisputed corporate giant.

Sprint certainly was all that in the late 1990s and early 2000s.

Its local payroll stood head and shoulders above other corporate employers. With roughly 22,000 employees here, Sprint alone rivaled the federal government in jobs, said Frank Lenk, the Mid-America Regional Council economist.

He said a rapidly growing Sprint also created a sense of optimism that the Kansas City area was “a city on the road to the future, and we had a company that was proving it.”

Sprint’s unrivaled girth also shook the area’s real estate market. Before building its massive headquarters campus in 1997, Sprint’s appetite for office space forced it to outbid other potential tenants and drove up rental rates for landlords.

Moving everyone to the campus turned the tables and depressed rents, a bargain for tenants but a bust for landlords.

“They called that the Sprint effect,” said Ted Murray, chief executive of the Kansas City office for the real estate firm Colliers International.

More recently, the Sprint effect returned when it leased 900,000 square feet of its 3.9 million square-foot headquarters campus to other companies, competing with other landlords.

Sprint also has been active on the political front. It donated money to the 2004 campaign to win Kansas City voters’ approval of a downtown arena that later came to bear the company’s name. Sprint marketing officials also worked with the political team on the campaign.

“They weren’t just sitting in the bleachers. They were engaged and involved,” said Steve Glorioso, the political consultant who helped lead the campaign.

The Sprint Foundation has been a steady force in philanthropy in the area, as have contributions of time and money by Sprint workers and executives. Since 2006, there has been a Sprint member on the United Way board of trustees every year but one, and Sprint senior vice president Will Souder’s term stretches into 2018.

CEO Claure has pushed the Sprint 1Million Project to bring internet service into the homes of Kansas City Public Schools students who aren’t connected outside the classroom.

As Sprint’s fortunes have declined, however, so has its total impact on the area.

Bill White served on area boards as a Sprint executive and still does after his retirement from the company in 2015.

“You don’t see Sprint executives on boards to the extent you did before,” White said.

Fewer employees means area charities also see less of their resources coming from Sprint.

Sprint’s employment at its headquarters campus has remained at about 6,000 since several rounds of layoffs after the first run at a T-Mobile merger failed.

Some of the long decline from nearly 22,000 came when Sprint spun off its local telephone business as a separate company called Embarq, which later became part of CenturyLink. Sprint also moved 2,000 area employees to Ericsson under a contract to maintain the Sprint network.

Other employers have moved into the void as Sprint’s impact has declined. It means the area economy has gained a more rounded balance with Sprint ranking among a cadre of corporate leaders such as Cerner, Garmin and Burns & McDonnell.

It means Kansas City is better positioned to absorb whatever impact may come from Sprint’s moves. But it won’t be painless.

“It’s still a drag, and it’s still important, and it still will hurt,” Lenk said.

This story was originally published April 28, 2017 at 3:27 PM with the headline "Sprint’s last stand? Sprint, Kansas City again sit at the center of merger speculation."